United Kingdom Special Commissioners of Income Tax Decisions

McEwan v Revenue and Customs [2005] UKSPC SPC00488 (27 June 2005)

SPC00488

COSTS – whether the Revenue acted wholly unreasonably in connection with the hearing in continuing to contend for a figure for unexplained bankings when they knew that these did not represent takings – yes in principle but costs not awarded as the parties succeeded in roughly equal amounts

THE SPECIAL COMMISSIONERS

HAYLEY McEWAN Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Special Commissioner: DR JOHN F AVERY JONES CBE

© CROWN COPYRIGHT 2005

DECISION ON COSTS APPLICATION

1. In my decision in the appeal by Miss Hayley McEwan issued on 5 April 2005 I noted that Mr McEwan had made a costs application in writing that I had failed to deal with at the hearing. This is the decision on costs.
2. My jurisdiction in relation to costs is contained in paragraph 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994:

"(1) Subject to paragraph (2) below, a Tribunal may make an order awarding the costs of, or incidental to the hearing of any proceedings by it against any party to those proceedings (including a party who has withdrawn his appeal or application) if it is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question.

(2) No order shall be made under paragraph (1) above against a party without first giving that party an opportunity of making representations against the making of the order

(3) An order under paragraph (1) above may require the party against whom it is made to pay to the other party or parties the whole or part of the costs incurred by the other party or parties of, or incidental to the hearing of the proceedings, such costs to be taxed if not otherwise agreed.

(4) Any costs required to be taxed pursuant to an order under this regulation shall be taxed in the county court according to such of the scales prescribed by rules of court for proceedings in the county court as may be directed by the order or, in the absence of any such direction, by the county court…."

Mrs Parslow, on behalf of the Revenue has made a written submission dated 10 May 2005, to which Mr McEwan commented by letter on 19 May 2005 and, in response to a question from the Tribunal, Mrs Parslow wrote a further letter on 13 June 2005.

3. In the decision I found as a fact that:

"Mr Kilford [the Inspector] was not satisfied with the records and after obtaining some explanations closure notices were issued on 29 May 2002 in respect of both years making the following adjustments: for the year 1997-98, disallowing rent of £5,000 as it had not been paid, disallowing purchases of £576 which had not been substantiated, increasing sales by petty cash expenditure of £459.43, and increasing sales by £7,853.81 on account of unidentified deposits in three bank or building society accounts: £7,341.81 into the Bradford & Bingley Maximiser account, £212 into the Bradford & Bingley Time Saver account, and £300 into her Midland Bank account. For 1998-99 rent of £5,000 was disallowed, personal national Insurance payments of £328 and tax payments of £449 were disallowed, and sales were increased by £8,000 in line with the previous year's increase."

4. I stated in the decision:

"It seems to me that, Mr Kilford having conceded that this figure does not represent undeclared takings, the Appellant has satisfied the burden of proof in relation to this sum. While I can understand that Mr Kilford is still not satisfied about the accounting records, he has used what were then thought to be unidentified bankings as the method of measuring undeclared takings and, so far as the Maximiser account is concerned, the Appellant has identified the bankings to his satisfaction. I consider that is all the Appellant is required to do and that there is no justification for the addition of £7,341.81 for the first year. I doubt that if he had come to that decision before the closure notice he would have included the £7,341.81 in the closure notice. If that figure is removed from the first year there is no justification for the £8,000 addition in the second year."

5. In figures, my decision was that the Appellant succeeded in relation to the £7,341.81 for 1997-98 and £8,000 for 1998-99, and the Respondent succeeded in relation to £5,929.75 and £5,777 in the two years respectively.
6. It is now agreed by the Revenue that at the time the closure notices were issued the Revenue did have information that demonstrated that the unexplained deposits in the Bradford & Bingley Maximiser account were not from the business, but that Mr Kilford was not aware of this. Mr Kilford agreed at a meeting between the parties on 21 February 2003 that the money deposited in that account had been included in the takings figure. However, he was concerned about other aspects of the case including the lack of records, the estimated drawings figure, omitted takings used for cash purchases and the missing record of takings for particular months. He therefore continued to contend, as he did at the hearing, for the addition to profits figure in the closure notice.
7. In my view while he was completely justified in not being satisfied with the Appellant's accounts, he was not justified in persisting in contending for the figure in the closure notice after discovering that it was based on a false assumption. A closure notice informs the taxpayer that the officer has completed his enquiries into the return and states the officer's conclusions by making the amendments of the return required to give effect to his conclusions (s 28A Taxes Management Act 1970). Here his conclusion was that he thought that the bankings into the particular account represented undeclared takings. If he then learns that they do not, he cannot continue to argue for the same addition to profits because he is not satisfied with the accounts generally. The taxpayer must know what he has to argue against in order to appeal against the closure notice.
8. While in principle in relation to the bankings I consider that the Revenue has "acted wholly unreasonably in connection with the hearing in question," the result of the appeal is that each party has succeeded in roughly equal amounts. Although I have power to award costs I do not consider that this is a case where costs should be awarded.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER

RELEASE DATE: 27 June 2005

SC 3060/03